Diamond Security Systems’ revenues for 2021 totaled $27.5 million. As with most companies, Diamond is a defendant in lawsuits related to its products. Note 14 of the Diamond annual report for 2021 reported the following:
Requirements
1. Suppose Diamond’s lawyers believe that a significant legal judgment against the company is reasonably possible. How should Diamond report this situation in its financial statements?
2. Suppose Diamond’s lawyers believe it is probable that a $2.8 million judgment will be rendered against the company. In general terms, how would this situation be reported in Diamond’s financial statements (using U.S. GAAP)?
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
If Diamond's lawyers believe that a significant legal judgment against the company is reasonably possible, Diamond should disclose this information in its financial statements in the notes to the financial statements. Specifically, Diamond should include a description of the nature of the contingency and an estimate of the possible loss or range of loss or state that such an estimate cannot be made.
If Diamond's lawyers believe that it is probable that a $2.8 million judgment will be rendered against the company, Diamond should recognize a liability and an expense in its financial statements. Specifically, Diamond should accrue for the estimated loss in the financial statements if the loss is probable and reasonably estimable. Diamond should record the liability at the estimated amount and disclose the nature of the contingency and the amount recognized in the financial statements. The amount recognized should be based on management's best estimate of the outcome of the contingency, and should be adjusted in subsequent periods if new information becomes available that causes a change in the estimate.
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